Thursday, 1 July 2010

euro pop

Yesterday had some interesting news that he feels slipped under his radar, that is perhaps playing out a little today. The ECB auction for funding went well and the commentary is that there still is some "excess liquidity" in the sytem. This positive sentiment and the fact the demand fell within the expected range is perhaps the reason that the bund has failed to rally on the equities sell off, which would also go some way to explaining the $EURUSD rally. Interesting to note however that initially this morning it wasn't a USD move, it was a EUR move, however with the employment numbers perhaps the read is going to be that the US really isn't that much ahead of the rest of the world on the road to recovery, and Europe's problems really are going to be the world's problems. It certainley feels like that in the UK, even though its not a member of the euro.

The other point to note is that the this month the euro area is going to be doing its stress tests. This will be run a very different manner to the successful US stress tests. The central authority will outline the broad details of the stress scenario, leaving the details and stress testing to local regulators. Obviously they will have zero meaningful data if they don't properly stress government bond markets in their scenarios, especially looking at the price of Greek bonds! but that isn't really the point of these stress tests, they're just an attempt to make the market feel like there is a finger on the pulse. They may well work, even if they have are meaningless, stranger things have happened.

The Raven particularly enjoyed listening to Greenspan's interview on CNBC, a rather balanced and an apolitical point of view regardless of whether you think he's right or wrong. Much better than listening to senators barking at eachother.

Deutsche Boerse looks like a very interesting stock to the Raven. Its cheap from a valuation perspective, and certainley trades at a large discount to its US peers. The Raven believes it should face less competition within this home market, it also has much more exposure to derivatives. Ordinarily this statement would be not be positive in this environment, however its not hard to believe that exchanges will benefit from proposals to have all OTC transactions cleared through independent clearing houses, it certainley isn't a wild idea to make CDS trade on exchanges.

He remembers in 2006 (maybe 2007), the launch of the European Xover Index trading on exchange, funnily enough the HF community and a lot of users of the CDS market thought this was a good idea, however the dealers for some mysterious reason thought it was a bad idea and conspired to kill this listed contract. It might have something to do with their large trading margin, superior capital margining requirements, and the massive benefit of asymettric transparency they had in this OTC market. It certainley will be interesting to see how this develops over the next couple of years.

The stock hasn't been doing that much recently and looks a bit like a value trap to the Raven, so he's not doing anything with it, but its definitely on the watch list!

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